Wednesday, December 30, 2009

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Brad: So, the problem is that by using more time than estimated, there is less time left in the month to produce and ship the margin on subsequent jobs. Sometimes, what margin is shipped in total is less than the fixed costs for the month, and then there is a loss for the month.

Dr. Lisa: Yes, and that is the problem that most owners are trying to avoid. And the way we were all taught to do that is -- cost allocation. However, you can make sure that you make enough margin in total without allocating any costs and it’s actually simpler and more straight forward.

Just plot the Margin dollars you ship everyday (what we in Theory of Constraints Throughput Accounting call Throughput) and compare that to your Operating Expenses. And remember, if you work overtime, you’ve increased your Operating Expenses. Once you understand the relationship between Throughput and Operating Expenses, you have all the information you need to ensure you ship enough work in total to make money.

A company can lose money, but a job rarely does. Jobs aren’t unprofitable, and for that matter, products are rarely unprofitable and customers are rarely unprofitable. Companies lose money because the margin in a month does not cover the fixed costs for a month. Otherwise, the margin on all jobs, products, and customers in excess of that month’s fixed costs all collectively add to the overall profits for that month.

Cost accounting is alive and well in American business (and around the world really), even though it is an invalid, old technology. The continued—and unquestioned—use of cost accounting has led directly to the loss of competitiveness and long-term decline of American manufacturing. Stop using it!

Brad: You give a lot of speeches to business owners. Tell me again, what drives you nuts?

Dr. Lisa: When someone says “We lost money on that job” or “We lost money on that project".

Brad: That’s cost accounting talking. It’s amazing the owner is still in business, saying something like that. If his competition didn’t all think the same way, he would be out of business.

Dr. Lisa: Truly variable costs—materials, outsourcing, freight, sales commissions—are normally just a fraction of the selling price. There are only two ways to lose money on a job: 1) charge less than your truly variable costs; or 2) re-work a job over and over again causing you to incur the truly variable costs multiple times and the total of all the truly variable costs are more than the price you charged.

Brad: The all-industry average for truly variable costs (TVCs) is 40%. And machine shops are usually much less than that, depending on the type of work they do. So why does the business owner think he “lost money on that job”?

Dr. Lisa: It’s the allocation of overhead cost, the number one conceptual mistake of cost accounting. Remember, cost accounting was invented back at the turn of the last century, when labor was paid piece rates and overhead was less than 10% of total costs.

What really happened was that the job took more time than estimated. And since cost accounting allocates “cost” to that time, the job “cost” more than expected, perhaps more than the price. But this is a mirage. The margin received — the sales price minus the truly variable costs — is the same no matter how long the job took to produce.

Dr. Lisa: Back to the process for handling a “yes, BUT”. We are saying “yes” to the solution, and the “BUT” is a negative we anticipate if we go forward with the solution. So the first step is to identify which part of the solution your concern stems from. State this explicitly. Next, indicate what your concern is, what negative could occur (called Negative Branch Reservation). Now together you can figure out that (1) either that you misunderstood the solution or (2) that you are correct that the negative could happen. If so, how could we modify the solution to eliminate completely or substantially the possibility of the negative?

Brad: That sounds a little theoretical. Do you have an example?

Dr. Lisa: Sure. When we are doing the Velocity Scheduling System with a machine shop, someone in the management team will often have the idea to do preventative maintenance. In this example, this is the “part of the solution the concern stems from”. Someone will respond that there isn’t enough capacity to do preventative maintenance without being late on orders. This is the concern, the negative that could occur.

Brad: What’s the solution to trim the negative branch?

Dr. Lisa: To do both -- to complete ALL the orders on-time AND do the necessary preventative maintenance. The Detailed Planning portion of the Velocity Scheduling System is what we use to see and plan for opportunities for preventative maintenance while maintaining 100% due date performance.

“Dealing with yes, BUT’s” is one of the bonus videos included in the Velocity Scheduling System which is based on Goldratt's Theory of Constraints and Drum Buffer Rope.

Brad: You’re making the case for people expressing their concerns whenever a solution is presented? That this is a good thing? Doesn’t this slow down the whole process? If I have a good idea—and as a business owner, it goes without saying that all of my ideas are great ideas—why shouldn’t I just have everyone go implement?

Dr. Lisa: We weren’t taught how to deal with the situation where someone presents an idea, and we have a concern to express about the idea. In Theory of Constraints (TOC), we call the process “Negative Branch Reservations”. It is part of theTheory of Constraints Thinking Processes. There is a straightforward logical process for doing so. And yes, it is an important part of processing each and every solution, and getting your people to buy-in once all the reservations have been raised and dealt with.

Oh, by the way, a lot of your ideas aren’t so hot before we had addressed my negative branch reservations. Don’t you remember…?

Brad: Never mind about that. Explain the process, please.

Dr. Lisa: First, let’s agree on the criteria for a good solution. The presenter should feel good about offering an idea or solution to a problem. If someone responds by saying “let me think about it”, he or she should honor that agreement and does think about it. By thinking through the concern, we get the benefit of the idea and block potential negatives, thereby becoming better managers, and getting better results.

Brad: So the old adage, “an ounce of prevention is worth a pound of cure”.

Brad: Both as a business owner, and back when I worked for large companies, I have found a lot of negative people. Someone has a good idea, and then it seems like everyone has a “yes, but…” It’s irritating.

Dr. Lisa: Particularly if it’s YOUR idea. In Theory of Constraints, we call that a “yes, BUT”; Small yes and a big BUT.

Brad: Why can’t people be more positive and optimistic? It seems like such negativity blocks progress. Perhaps such people are the problem.

Dr. Lisa: Hold on. To voice concerns is part of human nature. When we hear an idea or solution presented, it is natural to think of what negatives might come from it. The presenter is normally very proud of his or her suggestion, and just as often is not fully aware of what negatives might result from implementing it.

Brad: So he or she is expecting praise and to get credit for the idea?

Dr. Lisa: Exactly. Now, depending upon the trust level and power relationships within the group, and whether there have been previous bad experiences from raising concerns, the concern might not be expressed. Instead, you might hear “let me think about it”. However, we don’t think about it. What we think about is our “BUT”, and hope the idea just goes away. So, we don’t benefit from the idea, and we miss the opportunity to improve it by voicing the concern.

To take advantage of this great offer, check on any of the hyperlinks in this post.If you miss this opportunity, just send me an email and let me know that you want to be notified the next time there is a sale.

This video takes The Goal book and shows you how to put the theories to work in your company.

Based on the best-selling book by Eli Goldratt, The Goal tells the story of Alex Rogo, a plant manager facing the threat of his plant's closure. The video follows Alex and his team as they use the Theory of Constraints to transform their mediocre division.

The first obstacle standing in the way of implementing a major change is reaching a wall-to-wall agreement on the direction of change. A powerful tool that can be used to create such agreement is The Goal: The How-To Version” video. The use of this video is not limited just to the beginning of the implementation process. Reaching agreement on the change in direction is not a one-time effort. As the company moves in a new direction there will be some unavoidable diffusion. To prevent too much diffusion there is the need to repeatedly realign interpretations and periodically use the movie.

Most of you have read The Goal. Most of you enjoyed reading it. And most of you have lent or given a copy to someone you think will benefit from reading it. Today, it still sells as many copies a month as it did when it was first published.

Dr. Eli Goldratt’s newish book The Choice (his newest you will also find on this link) is even better than The Goal. It’s about thinking clearly and having a full life.

For those of you that follow Eli and the Theory of Constraints, you may know that when he was about twenty years old he chose as his goal in life “to teach the world to think”. What you may not know is that his daughter, Efrat, now a psychologist, chose as her life goal “to teach people how to be happy”.

Once again, he chose the format of a novel. In this one, Eli and Efrat have an ongoing conversation. Now 63, in this book Eli is summarizing their collective progress toward their respective goals.

In their conversation, Eli and Efrat chart the course for anyone and everyone to think clearly and have a full life. And in doing so, they reveal Eli’s unusual beliefs:

1. People are good. Rather than thinking that people are good, people tend to blame other people, or as Eli says “I want you to realize how careless we are in relating derogatory characteristics and intentions to people”. Once you blame someone, your ability to think clearly is blocked. “Blaming another person is not a solution… Blaming points us in the wrong direction, into a direction where we will not find a good solution. Even if the person is removed, in most cases the problem will stay. You will be able to refrain from blaming people when you are convinced there is no reason to blame them. Harmony exists in any relationship between people.”

2. Every conflict can be removed. “People’s perception is that conflicts are a given and the best we can do is to seek a compromise. When we face a conflict, especially when we cannot easily find an acceptable compromise, let’s do exactly the same thing scientists do when they encounter a contraction; let’s insist that one of the underlying assumptions is faulty. If, or should I say when, we pin down the underlying assumption that can be removed, we will remove the cause of the conflict; we solve the conflict by eliminating it.”

3. Every situation is exceedingly simple. “There is nothing wrong with people’s brainpower; there is something very wrong with people’s perception of reality. People believe that reality is complex, and therefore they are looking for sophisticated explanations for complicated solutions. Do you understand how devastating this is? The key for thinking like a true scientist is the acceptance that any real life situation, no matter how complex it initially looks, is actually, once understood, embarrassingly simple.”

4. Every situation can be substantially improved. “The undesirable effects people complain about are the result of a conflict—a conflict between the parties in cases of relationships, and an internal conflict in cases of individuals. People, and companies, lower expectations when they use protective mechanisms to camouflage from themselves the big chronic problems; the problems that they already gave up on resolving. Those who are not prepared will be blind to the stream of opportunities life presents them.”

5. Every person can reach a full life. “You claim that the only things standing in the way of me thinking clearly are some specific obstacles and practice. Rather than leaving it to chance—what people call good luck—my chances of living a full life will be much greater if I learn to think clearly. I’ll be able to generate, or at least to recognize, the right opportunities for me, and I’ll be better able to have more stamina to persistently follow enough of them to fruition.”

6. There is always a win-win solution. “For every relationship there is a change that will cause the parties to each achieve what they need from the relationship. Compromise is the attempt to share a finite cake. When do we find an acceptable compromise? When the perception is that the cake is not very important, or that it’s not too small to start with. But when the cake seems too small, seeking a compromise is a situation in which the more you win, the more I lose; seeking a compromise is, by definition, a win-lose approach. If we want our win to be bigger we have to ensure that the other side’s win will be bigger.”

To get The Choice at a price even lower than at Amazon, click on the book title. After you read the book, you may be interested in learning the TOC Thinking Processes. These are the tools Eli developed to help the rest of us systematically develop solutions to problems through rigorous cause and effect logic, just like he does in The Choice. The Management Skills Workshop will help your management team to learn and apply the Thinking Processes to your company. We’d be happy to point you in the right direction, so just call, email, or leave a comment below.

Bob: "Seller's are being required to participate by providing owner financing. Banks and the SBA like to see the seller committed to the deal, and having owner financing as part of the deal does that. However, most of the deals that are getting done are using non-traditional financing."

Brad: "If transactions are down by 90%, are there fewer owners trying to sell?"

Bob: "Sure. There are 70% fewer businesses for sale. Some owners will not owner finance. Others have postponed selling for now. Some distressed businesses are running for cash, and will just close. Others are bypassing traditional financing and trying to sell with 100% owner financing."

Brad: "It seems as if the valuations should be dropping under these market conditions."

Bob: "For smaller transactions, and riskier transactions, if the deal is getting done at all, it's often for a lower price compared to a year ago. Then, multiples were in the 3 to 5 times EBITDA range, now they are in the 1 to 2 times EBITDA. These are the kind of deals you'd see main street business brokers handle.

Brad: "What happens to the value of a business that has suffered in these economic conditions?"

Bob: "If sales and/or profits have declined, it is difficult for a buyer to project future earnings. That makes the deal riskier, and most likely the business is worth a lot less, even if the seller has a very good story. The owner should get sales and earnings back on track as fast as possible. We like to see three to five years of improving performance to maximize the sales price."

Brad: "What's your recommendation to an owner that was planning on selling about now?"

Bob: "A good business should still sell for a good valuation. The most important thing is to be prepared. Have your books in order. Understand the selling process. Understand the due diligence process you'll be put through by the buyer. Assemble your team of experienced transaction attorney, CPA, sell-side M&A representative, and other appropriate advisors. Remember that while you'll sell your business once, the buyer may be very experienced in buying businesses. You don't want to be at a disadvantage by trying to conduct the selling process by yourself. Deal structures are very fluid now. You need to work with an advisor that is on top of things."

Brad: "Is there a silver lining?"

Bob: "Yes, for bigger and better businesses, there are classes of buyers with cash that are anxious to find good deals, and there aren't very many good deals right now. Our completed transactions, using a controlled auction process, continue to be at the same multiples as before." ----------------------------------------------------------------------------

What's your business worth? What do you want to sell it for? How are you going to close the gap? What's your exit plan? If you are a business owner that would like to sell your company or create your exit strategy, please contact Brad Stillahn at Brad@ScienceofBusiness.com.

Recent events have affected the value of privately held companies, including machine shops. The market is different. Demand is different. Supply is different. Availability of credit is different. Buyer's taste for risk is different.

In most cases-but not all-that means your business is worth less. We want you to bring your exit strategy up-to-date so you can manage your most valuable asset, your business. For an insider's view of what's happening and current business valuations, we're interviewing one of the top sell-side merger and acquisition specialists in the country, Bob Forbes.

Brad: "Bob, help us understand what's happened to market conditions for selling a privately owned business"

Bob: "As you know, with the turmoil in financial markets since last year, credit availability from traditional institutions has significantly decreased for financing business acquisitions. There has been a big drop, perhaps 90%, in completed transactions."

Brad: "Wow, that's huge, and at a time when many business owners have planned on selling."

Bob: "One complicating factor is a change of policy at the SBA. Both the buyer and seller could count on the SBA to guarantee loans up to $2,000,000 for goodwill (the difference between the value of assets sold and the total selling price). Now the SBA is only willing to guarantee $250,000. More than that requires a large application fee without any assurance of being approved. That's one reason fewer deals are getting done."

Brad: "Most businesses find that their fixed costs increase nearly proportionately when sales increase. How is this avoidable?"

Dr Lisa: "Yes, and some gleefully hit a sales goal only to notice that profits have decreased due to having to increase fixed costs to meet the goal."

Dr. Lisa: "By leveraging the resources they have. There needs to be a monitoring system for the performance of operations. By determining the reasons why due-date commitments are threatened, actions can be taken-using lean and six sigma tools-to improve performance, normally without adding resources."

Brad: "Can a small business owner lead this kind of improvement process?"

Dr. Lisa: "Sure. The companies going through the Velocity Scheduling System Coaching Program are doing that now. They are getting to 100% due date performance in about 2 months WITHOUT a consultant camped in their conference room and at a fraction of the price. Next, those companies will participate similarly in an on-line version of the Mafia Offer Boot Camp. The combination of those 2 programs will get those companies on their way to a Viable Vision."

Dr Lisa: "Actually, having the owner and his/her executive team really drive Viable Vision kind of improvement is the only way to go. They just need a proven process and little coaching so they know how to apply the concepts to their situation along the way."------------------------------------------------------------------------If you are a business owner that would like to turn your company's sales level into its profit level in four years or less, please contact Brad Stillahn at Brad@ScienceofBusiness.com with an email that says "I'm interested". We recommend our www.MafiaOfferBootCamp.com to develop your Mafia Offer, and our www.VelocitySchedulingSystem.com to achieve 'perfect' operations

Sunday, November 1, 2009

This is the package that I recommend most for people who really want to learn Theory of Constraints. What I like about it is that the tracks of the first 4 self learning videos match the tracks of the 4 Insights. So as your clicking around the Insights you can listen to Dr. Eliyahu Goldratt talking from the video CD.

And there are 4 Insights coving the same first four topics as above. The Insights are like a PowerPoint presentation that you can click through an explore the topics in more detail.

Usually I recommend this package when it's on sale for $741 because it's such a good value. The 2 products sell for over $1400. But for the month of November 2009 you can get it exclusively (right here) for only $499.

Brad: "And what kind of improvement is possible, say for a machine shop?"

Dr. Lisa: "We call what is possible 'Viable Vision'. It varies for different types of businesses, but the results that are possible are bigger than most business owners dare imagine. One definition of Viable Vision is to 'turn your sales level into your profit level in four years or less'."

Dr. Lisa: "Another definition is to increase the percent return-on-sales to a level that the owner, at the outset, would definitely agree is unrealistic. For example, a business that has hovered around breakeven can easily have a 20% return-on-sales, but the owner probably thinks this is unbelievable. And it doesn't matter how small or large the company is; it's possible. The amount of TVCs a company has, as a percent of sales, will have an impact on how long it will take. But it is possible."

Brad: "So what you're saying is a business with $2 million in sales could have $2 million profit by the middle of 2013. Or $10 million sales into $10 million profit. Have you forgotten about the recession?"

Dr. Lisa: "The recession just highlights the importance of sales. A business with an offer 'too good to refuse', what I call a 'Mafia Offer', will grow sales in any economic conditions. We have experience with companies that traditionally had a 'hit rate' of less than five percent, increasing that to well over 50%, while reducing their sales cycle time."

Brad: "What do you mean by 'perfect' operations?"

Dr. Lisa: "When we develop a Mafia Offer, there is a need for operations to be very reliable. By 'perfect', I mean it must be a rare occurrence for the company to miss a due-date commitment or whatever the offer promises. A Mafia Offer is backed up with a solid guarantee, in the form of a self-imposed penalty for non-performance of the offer, so if we're late, for example, we might be giving the customer the order for free."

Dr. Lisa: "No matter how unreliable a machine shop might be now, they can become 100% on-time in a very short period of time, like two months."

... to be continued.

Here's to maximizing YOUR profits!

Dr Lisa Lang

P.S. If you have an internal constraint (not 100% on time), check out www.VelocitySchedulingSystem.com (based on Golratt Drum Buffer Rope) Group 5 starts November 23, 2009! (for job shops only)

Brad: "So, we agree on the problem. What's the direction of the solution? How can a small business owner get the talent they need to grow profitably?"

Dr. Lisa: "Well, that depends. It is ultimately the business owner's decision. I think it comes down to two choices that are not mutually exclusive:1. Build an effective management team, and/or2. Get outside help."

Dr. Lisa: "When small business owners think about getting outside help, they generally think about solving specific problems, not about running the overall business better. They'll get one consultant for one type of improvement, and a different consultant for another type of problem."

Brad: "We're back to affordability. Outside help costs a lot of money. If I have a problem I can't fix myself, I'll get the help I need to fix the problem. Like a plumber, electrician, or a 6S Lean consultant."

Dr. Lisa: "Think bigger. A business should be a money-making machine. There is one overall process that needs to be defined and improved."

Brad: "Well, I can think of a couple of examples of ways to get outside help. One is to belong to and be active in an industry association like NTMA. That's a way to learn from successful peers. Another is to join a CEO membership organization like Vistage. I've been a member for six years and it has provided me value."

Dr. Lisa: "Absolutely, both are important. But I have a recommendation. Get help to specifically improve your business, your money-making machine."

Brad: "I did that. I paid for the best TOC consultants available for four years before I felt I was self-sufficient. But that was expensive. The day-rates were sky-high. We're back to affordability."

Dr. Lisa: "Any good consultant should be willing to get paid if and only if they produce bottom-line results."

Brad: "But we've made the case that a business owner can't know everything. Can a consultant know it all?"

Dr. Lisa: "Well, we like to think so! I recommend a business process improvement team that is involved over a period of time to help the business owner achieve his or her goals. To help them think big, we recommend 'Viable Vision'. Viable Vision is defined as turning your sales level into your profit level in four years or less. It's aggressive but doable. And the value of the business soars with such increased profitability."----------------------------------------------------------------------------If you are a business owner that would like to turn your company's sales level into its profit level in four years or less, please contact Brad Stillahn at Brad@ScienceofBusiness.com with an email that says "I'm interested". We'll follow up to discuss how it just might be possible for you, and share with you our 100% results-based option where you pay if and only if your bottom-line increases."

Brad: "Well, we have a lot of reasons. And some good excuses. For some owners, it is affordability. Building a high quality management team is expensive. You have to have enough sales to be able to afford good people."

Dr. Lisa: "Just because you hire a person, doesn't mean he or she will be effective. Making a hiring mistake is very costly."

Brad: "That reminds me of a painful lesson I learned way back in the mid-1990's when my company was smaller. I was complaining to a couple of other business owners about the ineffectiveness of my General Manager. One of them asked me how much I paid the GM. I replied that I paid him $60,000 a year. He told me not to expect the performance of a $120,000 a year GM for half the price."

Dr. Lisa: "Of course, he was right. Too often we fill a key position with a body. Even a small company needs to run sales, operations, and accounting effectively. That requires good processes as well as good people."

Brad: "Let's talk about one of the most devastating reasons a small business owner tries to do it all: ego. I've been there, too. Too often being in charge is about always being right. But it's impossible for any one person to know it all."

Dr. Lisa: "Oh that reminds me of one of my favorite expressions: 'would your rather be right, or rich'?"

Tuesday, September 22, 2009

The annual TOCICO conference is in Japan this year and it's proving to be a very big deal. If you are a Theory of Constraints consultant, practitioner, professor, software provider, or just interested in learning more -- you should not miss this event.

Let me tell you why.

First of all, even though it's in Japan, it will cost about the same as attending last years conference in Las Vegas. Room rates are actually lower than Vegas – including breakfast. Airfares from the US are around $800. So the cost is affordable.

Second, there will be not one, but FOUR Living legends presenting!

Dr. Eliyahu M Goldratt is once again kindly donating his time to the TOCICO for a two day upgrade for members. Dr. Eli Goldratt will also close the conference with his provocative thoughts on the future. The opening keynote will be by the Director General of the largest of the government agencies in Japan - the Ministry of Land, Infrastructure, Transportation and Tourism. The MLIT director general will talk about TOC acceptance and a remarkable success case and future on-going Kaizen efforts using CCPM. This approach has created a win-win-win public works management transformation that is good for the taxpayer, good for companies and good for the government. The impact of TOC on the country of Japan is so significant that immediately following the TOCICO conference there will be a MLIT conference in the same hotel. The TOCICO is a major sponsor for this conference and has arranged so that you can attend this half day conference at no additional charge - 5 days of conference for the price of 4! Plan on staying through November 20.

At that MLIT conference, we are honored this year to be joined by one of the last living students of Dr. TaiichiOhno. Mr. Ohnishi, is currently Chairman of Chubu Quality Association. This is the association that annually awards the highly coveted Deming award in Japan. He was the executive managing director Toyota. Mr. Ohnishi will be presenting "Lessons from Dr. Ohno, father of Toyota Production Systems"

Mr. SuehiroNakamura, past executive vice president of Sony and a direct student of the two Sony founders, Mr. Akio Morita and Mr. MasaruIbuka has agreed to present "Lesson learned from two founders Sony, Akio Morita, MasaruIbuka --Total Value Stream Innovation to make win-win-win holistic supply chain management". He will show us how he managed holistic supply chain management in Europe and Thailand with was amazing results including having only 7 days of inventory - not only within Sony but including all retail stores including small shop) bring win-win-win to whole supply chain which he calls "value stream". You can also visit the Sony museum!

Airfares are at the lowest level in years. When you check, you will discover that you can get a round trip to Tokyo for under $900. The hotel room cost is lower than the cost at the 2009 TOCICO International Conference in Las Vegas. The conference fee is the same as 2009. Even in this tough economic time, this is a trip that will payback quickly. Can your company afford to miss this opportunity?

And my favorite part of these conferences is networking with all my TOC friends and meeting new ones. If you decide to go, please let me know so we can meet up!

Brad: “There are tons of books and articles written about leadership and managing people, yet it remains the number one problem for most organizations. Is TOC’s solution necessary?”

Dr. Lisa: “Yes. Managing organizations conventionally leads to all kinds of negative side effects that TOC simply eliminates. But there are a lot of other good tools and techniques that can help, too, especially when the leader is getting re-engaged with managing people.”

Brad: “At my recent Vistage Retreat, I facilitated my group through an evaluation of “The Five Dysfunctions of a Team”. As you know, the book by that name, written by Patrick Lencioni, has been very popular, and there is a companion workshop that a team can go through. The Five Dysfunctions are, progressively:1. Absence of Trust2. Fear of Conflict3. Lack of Commitment4. Avoidance of Accountability5. Inattention to ResultsWe thought this model was helpful, and the team assessment was particularly good.”

Dr. Lisa: “That’s a good example. In TOC, we would call that ‘agreeing on the problem’. That team assessment is not threatening. And it can tell you what your team feels are the critical issues to address. But the exercises in the workbook are not sufficient to really solve the structural problems. Fine, have the management team take the team assessment, and have the leader lead a discussion of where the team is, but then the leader needs to dig in and change the policies, procedures, and measures that drive behavior.”

Brad: “Well said. I like that because all too often, leaders jump to a solution without really understanding, deeply, the problem they are trying to solve. Having the management team better understand their problem is the first step to buy-in.”

If you would like your management team to the take a complimentary “The Five Dysfunctions of a Team” team assessment, contact Brad Stillahn for the survey. Once all of the confidential surveys are returned to Brad, you will receive the team summary.

Dr. Lisa: “That’s true. In almost all of our client companies, when we started working with them, the management team was dysfunctional. And a dysfunctional management team will inhibit or block almost every kind of improvement. It’s a problem that needs to be addressed.”

Brad: “What’s the way out? Is there a solution?”

Dr. Lisa: “Dr. Goldratt suggests that when the policies, procedures, and measures that drive behavior aren’t appropriate—and they never are when a company is managed conventionally—then people are captured in conflicts for which there is no good solution. For example, you see this with managers of different organizational silos having different goals and measures. So, production is almost always at odds with sales. The organization ends up continually renegotiating unhappy compromises.”

Brad: “Of course, TOC is holistic. One of the first steps for improvement is to change the measures. There are operational measures that help guide silos to do what is good for the company as a whole. Anyone that has read The Goal was introduced to them, but rarely has anyone implemented them. Next, we align the organization with the company’s strategy and tactics. Then the silos are not at odds with each other.”

Dr. Lisa: “TOC also has the Thinking Processes for dealing with all kinds of issues, including thorny issues between people. The ‘Management Skills’ were developed just for that. There are five Management Skills workshops dealing with different topics:1. Day-to-Day Conflicts,2. Half-Baked Solutions,3. Chronic Conflicts,4. The Lieutenant’s Dilemma (about whether to delegate or just do it yourself), and5. Reaching an Ambitious Target.I’d recommend these to the leader of any management team. Developing skills for dealing with these issues will go a long way to reducing conflict, and improving communication.”

Friday, September 4, 2009

Some of the best self learning materials for Theory of Constraints are in video format. The problem has always been that they are expensive. The Goal video DVD (movie version of The Goal book by EliyahuGoldratt) is $895 and the 8 CD set of the Self Learning Program is $999.

But for the month of September you can get both of those and a whole lot more of Goldratt's genius for only $499. Here what you will have access to:

Videos:

The Goal movie on DVD (sells for $895)

Necessary & Sufficient Series (10 CD set sells for $149)

Goldratt Explains is a set of videos excerpts of past and/or unreleased conference presentations, where Dr. Eli Goldratt shares his analysis and developments on specific topics.

TOCICO Conferences (sell for $249 for each conference and you get ALL of them)

Brad: “Joe is that problem personality you have in your organization. Joe’s just a nickname. It could be anyone, man or woman, exempt or non-exempt employee. People have to put up with Joe, have confrontations with Joe, avoid Joe, hope that the company leader will deal with Joe, etc.”

Dr. Lisa: “Sounds toxic. Why put up with that poison in the organization?”

Brad: “There’s generally a good reason. The person has special skills, or has built dependency in the organization around his or her silo, or has choked off information flow so no one else knows what’s going on. So, there is a risk and/or cost with taking action. We business owners can tell ourselves scary stories about what could go wrong if we try to deal with it, so we generally avoid dealing with it.”

Dr. Lisa: “Yeah, and if you don’t have a plan in place, and/or his or her replacement lined up, there is a real likelihood of things going wrong. The logic is clear. Still, it can’t be good for the morale of the organization to be tiptoeing around Joe.”

Brad: “Action is required. Occasionally, Joe has to go. But not always, it depends on the leader of the organization. Managing people is ultimately the leader’s responsibility. Most of the time, in small businesses, the leader is not good at or doesn’t know how to manage people. It’s not that they aren’t capable, they just don’t know how. They are very frustrated about it, too. They need help.”

Using the famous Theory of Constraints (TOC) analogy of a chain, “Dr. Lisa” described how the weakest link of a chain determined its ability to achieve its goal of holding weight. Any increase in the strength of any link—except the weakest—had no effect on the overall goal.

Similarly, the goal of a company is to make more money now and in the future. The weakest link in our company process—the constraint—determines the performance of the company: how much money it can make. So, we must focus on and leverage the constraint.

In this economy, the constraint your company is dealing with may have shifted. For many companies, the constraint has been in operations. You have been busy, trying to get out as much as possible, and were probably dealing with long quoted lead-times and poor due date performance because of the internal constraint.

Now, in these uncertain times, many companies are faced with not enough sales. In companies used to dealing with an internal constraint, the management team frequently lacks processes and intuition for dealing with lack of sales.

Dr. Lisa presented how to address lack of sales with a “Mafia Offer”, an offer so good your customers can’t refuse it, and your competitors can’t or won’t offer the same.

A Mafia Offer typically requires that you do something different (make operational improvements) to actually deliver something un-refusable to your customers and something that your competition can't or won't do because they are not willing to or don't know how to make the same improvements.

Most companies offer solutions that solve their customers various problems or symptoms. With a Mafia Offer we are addressing our customer’s core problem.

When you have a good Mafia Offer and you deliver it correctly, your close rate can increase to above 80%. If you close 80% or more of your prospects -- you have control over your sales. This control makes it easier grow and invest in your business while maintaining the ability to deliver the offer.

Mafia Offers are developed by analyzing 3 things:1. What are (or could be) your internal capabilities compared to your competition,2. How does your industry, you and your competitors sell what you sell, and3. Understanding how your clients are impacted by your current capabilities (which are usually the same as your competitors) and how you sell.

To protect the confidentiality of machine shops that have already developed their own Mafia Offer, she used an example from the printing industry. Using the TOC scheduling methodology, this printer had reduced their lead-time to two days, relative to two weeks for competition. The printer worked with clients that reordered products infrequently, in order to minimize purchase price, due to the price-quantity curve used by all printers. Because they had to forecast future usage in order to determine the quantities to order, customers invariably had too much inventory of some SKUs while they stocked out of others.

With the caveat that no company that is in the tooling and machining industry should think this Mafia Offer work for them, she told the audience the printer’s Mafia Offer:

“Mister customer, don’t give me orders. Your orders are based on your best guess of what you might need. Instead tell us every day what you used. We will guarantee on the one hand that you will not need to hold more than 2 weeks of inventory so you have more marketing flexibility and less risk for obsolescence, and at the same time we will also guarantee that you will never run out. If we ever stock you out, we will pay you $500 per day per SKU.”

That’s a Mafia Offer – best of all worlds for your customer and the printer will not pay a penalty because it only takes 2 days to replenish. The competition can not offer the same thing because they can not consistently deliver in less than 2 weeks and they could not risk paying the penalty.

The remainder of the presentation was devoted to describing the operational and mind-set changes required to have such a powerful Mafia Offer. Dr. Lisa described how Drum-Buffer-Rope scheduling works, and how “Buffer Statistics” guides ongoing improvement by pointing process weaknesses that Lean and Six Sigma tools can quickly fix.

She also described how the Mafia Offer challenged prevailing assumptions about “set-up cost”. The offer would require many more set-ups, but the printer had significant excess capacity. So, in reality, there was no additional set-up cost. Yes, there was additional set-up time, but all the people were already paid for in that period. And by knowing the importance of set-ups to delivering their Mafia Offer, the printer used Lean tools to dramatically reduce set-up time.

To view Dr. Lisa’s presentation, go to the Velocity Scheduling System page and get on the waiting list -- you'll have instant access. .

The focus, priorities, and actions your company takes should be different depending on whether your company is internally or externally constrained. If your company can produce and ship 20 to 30% more sales with existing resources, it is externally constrained.

If you’ve determined that your company is externally constrained, you need a lot more sales and fast. That’s the focusing mechanism of Theory of Constraints (TOC). Your attention should be on getting more sales.

Let’s make some assumptions:1. Your operations are 100% on-time (after all, you’re externally constrained, so you should have capacity to be on-time), and2. You have determined your target market, and3. Your conventional marketing and sales efforts are getting the results they are getting and you believe that won’t change much in the short-term, and4. Your company’s products and capabilities are desirable to prospects if they just knew about them (you need more qualified leads), and5. Your company has developed an un-refusable offer backed up by a guarantee (what we call a “Mafia Offer”), and6. You can’t to afford to spend much.

What’s the one thing you could focus on doing that would bring the biggest increase in sales? These days, it might be effective Internet Marketing.

Start with free or low-cost approaches to get prospects calling you.

First, your website needs to be more that a picture of your building or an on-line brochure, and should be built around communicating your Offer.

Second, use Search Engine Optimization (SEO). Select keywords that prospects are likely to search on when looking for what your company does. Your goal is to be on the first page of search engine results for those keywords.

Consider the following case of a client of ours. The starting condition was that their website was just a picture of their building. They were nowhere to be found on the search engines. That is, if you didn’t know their website address, it wouldn’t show up on a keyword search. They had no database of prospects. They had no marketing or sales representatives. In summary, their basic approach was to let prospects somehow find them, which wasn’t working very well.

The first thing we did was change the front page of their website to communicate their Mafia Offer. Rather than depending on outside programmers, we used an easy-to-change website technology (for just $25 per month) that gave the client the ability to make changes and update the website themselves. Next, we recorded a brief video of the client describing their Offer with an inexpensive webcam. Then we sent the video, imbedded with the keywords we had chosen (in this case, one was “custom metal fabricated parts”), to all of the social networking sites. Literally within minutes, the client was on the first page of the search results! Why? …because the Search Engines love video.

In addition, the client began to systematically use Pay-Per-Click advertising for the same keywords.

With the combination of Search Engine Optimization and Pay-Per-Click, our client started getting between 10 and 20 visitors per day to their website.

When a prospect finds you, it doesn’t stop there. You have to provide value. Perhaps it is a white paper on a subject that your company is an expert. Offer the white paper in return for the prospect’s name and email address. Our client began building their prospect list, and then began sending everyone an email every other week on a relevant topic related to what they do.

What were the results? After spending only $110, the client landed an account worth $80,000 per month. For a small company of $2 million annual sales, that was cause for celebration! The prospect had found our client by searching on-line for the keywords, and had really studied the client’s site on several occasions to understand the Offer before they called to follow-up. When the prospect called the owner, they were ready to buy!

Once your company is successfully using Internet Marketing, there is more to do. Upgrading your website and videos is important. Relevant content for your prospect list is crucial. Emails, blogging and podcasting may be appropriate. We also recommend your company get a Facebook account.

Want more information? Please email and we will send you a brief paper with more detailed recommendations on how you can manage Internet Marketing yourself, along with some example videos.

Our 4th Velocity Scheduling System Coaching Program starts on July 14, 2009. For more information, testimonials, and to sign up please visit Job Shop Scheduling. This program is limited to the first 10 companies, so don't delay!

As with any real constraint, your overall company only has one of them. For example, your company cannot be both internally and externally constrained at the same time (yes, we are aware that your company is different and more complex). A company that addresses its internal constraint can become externally constrained rather quickly, or vice versa, so synchronized corrective action is important.

For an internal constraint, TOC has logistical solutions for operations, projects, distribution and supply chain. The TOC logistic solutions usually need to be tailored to the company because you are different. Lean and Six Sigma tools can help increase the speed and effectiveness of implementing the TOC solutions.

For an external constraint, TOC has solutions for marketing (Mafia Offers) and sales. For other external constraints, TOC has thinking process tools to help identify the problem and the direction of the solution. Again, these normally need to be tailored to your company.

For a cash constraint, which is a special case of an external constraint, the TOC thinking process tools would need to be tailored to your company’s specific situation.

If you are diligent and effective, whether your company has an internal constraint or external constraint, the TOC solutions are powerful enough to correct the problem in about three months.

Please let us know where your company constraint is: internal, external, or cash. Email your answer to Theory of Constraints ANSWER . We will respond with our recommendation on what to do about it.

As you probably know we recommend strategically placing your constraint. The location of your constraint is a very important issue. Where's yours now and where do you want it to be -- where do you want your strategic constraint to be?

Your company is externally constrained if your company (usually) has the capacity to sell more than it does.

We call it externally constrained instead of market constrained because there a many other factors external to the company which may constrain its ability to sell. For example, government regulation is often an external constraint. Credit availability would also be an example of an external constraint.

Being externally constrained is not inherently bad. In fact, an amount of “protective capacity” is necessary to be responsive to the market, have competitive lead times, and meet due date commitments.

Conventionally, a company responds to being externally constrained by cutting costs, especially people costs by layoffs. In some instances, especially when the company is short of cash, this may be necessary. However, contrary to popular opinion and practice, such attempts to “balance” capacity to sales demand is not good management because it directly causes a chaotic work environment, leading to long lead times and poor due date performance.

Are you cash constrained? Yes or no?

Your company has a cash constraint if and only if you have enough customer orders but your suppliers will not supply you their products and services unless you pay with cash upfront.

Approached conventionally, a cash-constrained company will usually go bankrupt because in the short term, the timing of the cash outflows is more than the cash inflows, and the cooperation of the suppliers and customers cannot be achieved quickly enough to prevent the company from running out of cash.

While it is rather unusual to be cash-constrained, recent economic events may result in customers unilaterally stretching out payables and/or banks restricting credit, so a cash constraint can suddenly emerge.

I'm a lot like you. I read The Goal and loved it. I related to it, and thought it was common sense. It was so refreshing to read a business book like that.

I totally got the hike with the boy scouts and having Herbie lead, then off loading Herbie's backpack. The game they played with matches showed the impact of variability and why it is so hard to get things done.

All really good stuff and I read it in one sitting. I wanted the results they had in The Goal - I wanted to be 100% on-time, I wanted less chaos and less work in process, increased throughput and I wanted all this with the same or less overhead.

But then I really didn't know how to apply it to my situation. I didn't have the budget to hire a consultant to help, much less an expensive Theory of Constraints consultant.

So I did what I could, based on what I understood. I identified what I thought was our constraint, and I studied it. I determined what was keeping us from getting more through the constraint. I made a few changes.

And, we got some results. Nothing like what they had in the book mind you, but some results. But that is where I really got stuck.

I knew much more was possible, much bigger and better results. After I had read The Goal, I did some research and found some published success stories. These case studies showed that I should have achieved more.

But I rationalized -- we're different. We are in a different industry, a tougher industry. Maybe it just doesn't work in our type of business. Yeah, that's it - too bad, it just won't work for us.

Now fast forward a few years.

In the mid 90s Theory of Constraints became more available. There were annual conferences, training classes, and many more books on the subject.

I went to school on all of it.

I immersed myself in the theory. I read everything, I asked a ton of questions. And what's interesting is that I still didn't really know where to start. I still didn't know how to get beyond a few modifications around the constraint and I still didn't know how to get the kind of results I had read about.

And this was after I had been to the mountain. I had taken courses and studied at the Goldratt Averaham Institute founded by Eliyahu M Goldratt, the father of Theory of Constraints.

How can common sense be this hard?

I finally got it when I became a consultant and worked with several clients.

By the way, all my clients had read The Goal, and only achieved small results on their own or got no results because they simply did not know where to start and so had not tried.

My first client was a machine shop. And since then I've worked with a number of "metal benders" - custom machine shops making custom parts and job shops. Some of the shops I worked with had 80% of their parts/products repeat and some only had 20% repeat. But they all had terrible due date performance (on orginal dates), high work in process, and lots of chaos.

I needed to figure out how to make a difference in these highly complex environments where the constraint can move week to week depending on the mix of work that came in.

I discovered, in working with these clients, the secret -- the way to implement what we read in The Goal.

I figured out:

the order to implement. What to do first, then second and so on.

that the first steps we take need to provide BIG results to get the buy-in and support to continue.

that the scheduling and priority of the shop needs to be visual.

that the visual scheduling system facilitates eveyone's involvement and the desperately needed communication throughout the shop.

how to create an effective scheduling system that does not require massive computing and manpower to run.

how to accommodate a complex environment where the constraint moves frequently.

how to implement the Theory of Constraints process of on-going improvement so that we continuously improve.

and, how to coach managers and supervisors to get it done.

This approach lead to the big results that I had read about in the case studies and in most cases we achieved the results faster.

We also found that our visual scheduling system created faster buy-in and helped the changes to stick.

So my partner, Brad, and I sat down and documented what we did. We documented the process we used, we documented the differences between companies that can cause differences in the solution. We ended up with THE process to quickly implement what we read about in The Goal to get quick, substantial results.

So why am I telling you all this?

Well... this is something of an "open secret"... I have been working on a way for you to have the exact same system that my job shop and machine shop clients use without the burden and expense of an on-site consultant.

And we have now tested it with several clients and we have done 2 Velocity Scheduling System Coaching programs. So the program that starts on April 27th is our 3rd Velocity Scheduling System Coaching Program. We focus on job shop scheduling and machine shop scheduling.

Now is the right time for this. In fact, I would say that now is THE critical time. Implementing the system is particularly important in this economy for 2 main reasons. 1) With the system it will become clear where you can cut people and have the least effect on productivity; and 2) If you have a market constraint then it is paramount that you improve your due date performance and reduce your leadtimes so that you can capture more market share. This will be particularly effective as your competitors cut people, and get worse on due date performance and leadtimes.

This system has PROVEN to dramatically increase your due date performance, reduce your work in process and decrease your manufacturing lead-times without a consultant camped in your conference room. And of course, this will lead to improved cash flow and increase your profits!

Here's an update I got just received (April 15, 2009) from a client that participated in our VSS Coaching Program:

"Just to update you on our company status, I thought you'd be happy to know weare still 100% on time and raking in some good profits. I've seen a higher frequency of penetration into the red zone, but no late jobs. We just shipped the mother of all jobs today (in excess of 4000 man-hours) on time! Furthermore, the price tag was $750K, of which final throughput MINUS LABOR was nearly $390K! (Don't tell the customer that)"

Sunday, April 12, 2009

Recent economic events have changed the relationship many companies have with their markets.

Not recognizing this change is dangerous. You may need the change the way you are managing, and quickly.

Goldratt's Theory of Constraints (TOC) asks four fundamental questions related to the process of ongoing improvement:1. Why Change?2. What to Change?3. What to Change to?4. How to Cause the Change?

Let’s approach this at global level: your total company in relationship to its markets. Let’s ask some basic questions to determine quickly what global problem your company needs to address. This self-diagnosis will help you understand “What to Change?”

Are you internally constrained? Yes or no?

You company is internally constrained when it cannot meet market demands placed on it. Symptoms of being internally constrained include:1. Less than 100% due date performance, and/or2. Lead times in excess of your competitors, the industry standard, or what the customer should reasonably expect (evidenced by your large backlog).

Sometimes, you are not internally constrained even when these symptoms exist because you know the company is not as productive as it could or should be. A quick check is to ask whether the company could now sell an additional 20 to 30% more, and meet the commitment within normal delivery lead time. If you cannot, your company is internally constrained.